by Francesco Canepa and Frank Siebelt
FRANKFURT (Reuters) – The European Central Bank (ECB) will continue to set a “floor” on market interest rates in coming years, but commercial banks will play a bigger role in how much liquidity they want obtain, four sources told Reuters.
The ECB has started a review of its steering of short-term interest rates in a context where inflation is higher and the amounts of liquidity injected into the banking system via stimulus programs over the last decade are not are no longer necessary and even create some unwanted side effects.
For most of the past decade, the mechanism was simple: The ECB kept rates at or below zero and flooded banks with more liquidity than they needed through bond purchases. bonds and loans, in order to encourage them to lend in turn and revive inflation then considered too low.
Banks therefore no longer needed to borrow from the ECB and the overnight rate that the banks charged each other was aligned with that which the ECB charged for deposits.
This measure must now be changed since interest rates are well above zero and massive excess reserves are unnecessary, even leading to huge losses at the ECB and some of the 20 eurozone central banks.
ECB officials, meeting in Frankfurt last week, agreed that the institution would stick to a “floor” system, in which the central bank effectively sets the lowest rate at which banks lend to each other. others, the sources said on condition of anonymity.
But there is one important development: the ECB will not decide alone how much liquidity it will provide to the banking system once it finishes draining excess reserves in a few years, the sources added.
Bank officials agreed that commercial banks would help determine this amount when borrowing the reserves they need from the ECB, similar to what the Bank of England (BoE) already does. .
REDUCE THE GAP WITH DEPOSIT RATE
To facilitate this, the ECB will make borrowing cheaper for banks by lowering the rate of its weekly auctions, currently 4.5%, and bringing it closer to its deposit rate of 4.0%, the sources said. .
This “narrow gap” should help reduce the financial penalty suffered and the stigmatization of liquidity-strapped banks, particularly in the transition phase.
ECB officials also agreed that they would tolerate some fluctuations in the euro short-term rate (ESTR), the benchmark in the interbank market, around the institution’s deposit rate.
They plan to announce this new regulatory framework – known in market jargon as the “demand-driven floor” – next month, probably as early as the ECB’s March 13 meeting, the sources added.
For the moment, no change is planned with regard to banks’ reserve requirements, still set at 1% of customer deposits. The sources, however, indicated that some ECB officials are in favor of its evolution and could make proposals in this direction.
The sources also noted that there is debate over the size of the ECB’s bond portfolio and its composition, questioning whether it should be made up mainly of short-term securities or also longer-term securities.
When asked, an ECB spokesperson declined to comment.
(French version Claude Chendjou, edited by Kate Entringer)
Copyright © 2024 Thomson Reuters